Tax figures look good, wages less so

New Zealand is among the minority of developed countries where the tax burden on wages has lightened over the past three years.

The tax burden or wedge is measured by taking the total taxes and social security contributions paid by employees and employers, minus family benefits received, as a proportion the total labour costs for employers.

In its latest Taxing Wages report the OECD says that across its 34 members the tax wedge increased from 35.1 per cent of labour costs in 2010 to 35.9 per cent last year.

In New Zealand it dropped slightly from 17 per cent in 2010 to 16.9 per cent in 2013.

That is for a single person on the average wage and without dependent children and is the second lowest (after Chile) in the OECD.

Because New Zealand, unusually among OECD countries, does not fund pensions or unemployment benefits from social security levies on labour income, but out of the overall tax base, the tax wedge on wages is low by OECD standards.

Among the eight different combinations of family type and income level the OECD considers, New Zealand's tax wedge ranges from the lowest - for a couple with two dependent children and one earner on the average wage (2.4 per cent) - to the fourth lowest.

That tax burden for one-earner families with children is an increase from just 0.6 per cent in 2012 and is the highest it has been since 2005 when it was 12.8 per cent - before the introduction of Working for Families. The increase reflected freezing of the basic amounts in the family tax credit and in-work tax credit, the OECD said.

Between 2000 and 2013 the tax burden for a single worker on the average wage decreased from 19.4 per cent to 16.9 per cent, with half of the decline occurring since 2009. The corresponding figures for the OECD were a decrease from 36.7 to 35.9 per cent between 2000 and 2013, including an increase of 0.8 percentage points since 2009.

For a one-earner couple with two children and the average wage, the tax burden has fallen from 13.6 per cent in 2000 to 2.4 per cent last year, but has increased over the past two years from when they were net recipients of cash from the state.

The corresponding figures for the OECD as a whole were a decrease from 27.7 per cent in 2000 to 26.4 per cent last year, up from a low of 25 per cent in 2009.

But while the tax burden on wages looks good by OECD standards, the wages themselves do not.

When countries are ranked by average wage (on a purchasing power parity basis) New Zealand is 23rd out of the 34, and just 65 per cent of the Australian level. When adjusted for the lower tax burden (for a single worker with no dependent children) that improves to 75 per cent of the Australian level.